Research articles for the 2020-04-29

A Practical Stochastic Model for Projecting Nominal Interest Rates in a Monte Carlo Setting
Southall, John
We present a practical stochastic projection of nominal interest rate curves intended to integrate with Monte Carlo economic scenario generators. The model projects three time-varying parameters arising from a singular value decomposition of transformed historic interest rates, rather than modelling tenor points directly. A key feature is that we devise an empirically-motivated, rather than an assumed convenient form, transform function to apply to interest rates before performing the decomposition. This choice reflects an observed relationship between the volatility and level of interest rates. The resulting time-varying parameters, which we call time components, are projected as mean-reverting arithmetic random walks with mean reversion strength calibrated to historic behaviour. The drift of the model is adjusted so that the mean average of discount factors across simulations is in line with initial market-implied expectations. This adjustment preserves the required relationship between the level and the volatility of interest rates.

A Stochastic LQR Model for Child Order Placement in Algorithmic Trading
Jackie Jianhong Shen

Modern Algorithmic Trading ("Algo") allows institutional investors and traders to liquidate or establish big security positions in a fully automated or low-touch manner. Most existing academic or industrial Algos focus on how to "slice" a big parent order into smaller child orders over a given time horizon. Few models rigorously tackle the actual placement of these child orders. Instead, placement is mostly done with a combination of empirical signals and heuristic decision processes. A self-contained, realistic, and fully functional Child Order Placement (COP) model may never exist due to all the inherent complexities, e.g., fragmentation due to multiple venues, dynamics of limit order books, lit vs. dark liquidity, different trading sessions and rules. In this paper, we propose a reductionism COP model that focuses exclusively on the interplay between placing passive limit orders and sniping using aggressive takeout orders. The dynamic programming model assumes the form of a stochastic linear-quadratic regulator (LQR) and allows closed-form solutions under the backward Bellman equations. Explored in detail are model assumptions and general settings, the choice of state and control variables and the cost functions, and the derivation of the closed-form solutions.

A machine learning approach to portfolio pricing and risk management for high-dimensional problems
Lucio Fernandez-Arjona,Damir Filipović

We present a general framework for portfolio risk management in discrete time, based on a replicating martingale. This martingale is learned from a finite sample in a supervised setting. The model learns the features necessary for an effective low-dimensional representation, overcoming the curse of dimensionality common to function approximation in high-dimensional spaces. We show results based on polynomial and neural network bases. Both offer superior results to naive Monte Carlo methods and other existing methods like least-squares Monte Carlo and replicating portfolios.

A weighted finite difference method for subdiffusive Black Scholes Model
Grzegorz Krzyżanowski,Marcin Magdziarz,Łukasz Płociniczak

In this paper we focus on the subdiffusive Black Scholes model. The main part of our work consists of the finite difference method as a numerical approach to the option pricing in the considered model. We derive the governing fractional differential equation and the related weighted numerical scheme being a generalization of the classical Crank-Nicolson scheme. The proposed method has $2-\alpha$ order of accuracy with respect to time where $\alpha\in(0,1)$ is the subdiffusion parameter, and $2$ with respect to space. Further, we provide the stability and convergence analysis. Finally, we present some numerical results.

An Alternative View of Corporate Purpose: Colin Mayer on Prosperity
Ferrarini, Guido
In this paper I review Prosperity, which was published in 2018 by Colin Mayer, Professor and former Dean at the Saïd Business School at the University of Oxford. In Prosperity we find a passionate defence of the corporation as an institution. Mayer’s criticism mainly refers to how corporations have misbehaved and failed us in our era. As to possible remedies, M. rejects regulation as an appropriate response, save for financial firms. He would mainly rely on private law and corporate governance as a means to ground commitment to corporate purpose. He also suggests specifying corporate purpose in the articles of association of companies, a solution that has been recently adopted by the French legislator allowing them to define their raison d’être in the statute. I argue, however, that there are limits to this remedy, for the wording of corporate purpose will often be generic; managers will always find ways to circumvent it; shareholders will find it difficult to monitor compliance; enforcement of similar undertakings in cases of breach will be too difficult. I also argue that regulation should have a greater say in disciplining corporations than Mayer suggests. We cannot rely on corporate governance and shareholders as the main instruments to preserve the integrity of corporations.A balanced view of corporate purpose requires a multidisciplinary approach to the corporation. No enlightened CEO would manage a large corporation by looking narrowly at the financial capital or by targeting exclusively shareholder wealth creation. Rather, she will consider all types of capital and try to optimize the management of each of them if she wants the firm to grow sustainably. Indeed, stakeholders are taken care of even in countries that do not follow the German model of corporate governance, but a shareholder primacy model. Stakeholders’ protection in these countries mainly depends on either contracts or regulation (such as environmental and labour laws), but also on corporate governance to the extent that stakeholders’ interests are considered at board and management levels. In particular, the theory of enlightened shareholder value suggests that shareholder wealth should be maximized in the medium-long term, which requires the interests of stakeholders to be met as a condition for maximizing the value of the firm.In conclusion, I argue that corporate purpose should be seen from the intermediate perspective of the enlightened shareholder value theory, which represents a sort of compromise between the traditional shareholder primacy theory and the stakeholder approach to the corporation. Moreover, corporate purpose should be specified and implemented in practice mainly by the board of directors and the top managers, who should reconcile the interests of the shareholders with those of other stakeholders and the community in general. There is no need to specify the purpose of the corporation in its charter, even without considering the difficulties of such a definition and of its enforcement in practice. The criticisms developed in this paper, however, do not detract from the obvious merits of Prosperity which are also highlighted. This excellent book will stimulate fresh thinking and research on corporate governance and the future of the enterprise in modern capitalism. In addition, it will influence the work of legislators and the action of those constituencies that want to defend the corporation from political attacks and heavy regulatory interference, while promoting its integrity and prosperity.

Analyzing Active Managers' Commitment to ESG: Evidence from United Nations Principles for Responsible Investment
Kim, Soohun,Yoon, Aaron
We analyze active managers’ commitment to ESG using United Nations Principles for Responsible Investment (PRI), which is the largest global initiative to incorporate ESG. We find a significant increase in fund flow to signatory funds regardless of their prior fund-level ESG score. However, signatories do not improve fund-level ESG score while exhibiting a decrease in return. Further, they vote less on environmental issues and stocks in their portfolio experience increased environmental controversies. Funds that are smaller, younger, and had higher historical alpha are more likely to sign PRI but only quant-driven and institution-only funds improve ESG post signing. Overall, only a small number of funds improve ESG while many others use the PRI status to attract capital without making notable changes to ESG.

Battling Uncertainty: Corporate Disclosures of COVID-19 in Earnings Conference Calls and Annual Reports
Wang, Victor X.,Xing, Betty (Bin)
This study examines the informativeness of firm disclosures related to COVID-19 in earnings conference calls and annual reports (10-K) during the first quarter of 2020, when firms face tremendous uncertainty and little regulatory guidance. We find that investors react to COVID-19 related discussions made during the presentation of the conference calls but not to those during the Q&A session. We further find that managers’ tone does not provide information incremental to the COVID-19 discussions. This finding suggests that investors fixate their attentions on the overwhelming event and ignore the sentiment signals from firm managers. In our determinants model, we find that the extent of COVID-19 related discussions largely depends on industry membership and time effects, and does not depend on performance and firm characteristics. In our analysis using 10-Ks, we find that COVID-19 related disclosures are associated with short-term abnormal returns, suggesting that these disclosures are informative to the equity market. More interestingly, we find that risk disclosures in the Risk Factor Disclosure (RFD) section in the 10-K does not trigger any short-term market reactions after we exclude the COVID-19 related disclosures, again suggesting that disclosures about the overwhelming event COVID-19 crowds out investors’ attention on other risk information. Finally, we find a negative market reaction to firms that apply for the SEC’s extension on filing deadlines, even though the relief was specifically granted for COVID-19, suggesting that market generally interprets late filings as negative events, even in scenarios outside of the firms’ control.

Can Forward Commodity Markets Improve Spot Market Performance? Evidence from Wholesale Electricity
Jha, Akshaya,Wolak, Frank
Forward commodity markets allow more efficient risk-sharing and information aggregation, but there is little evidence that this reduces the cost of producing the commodity. We develop a measure of the extent to which forward and spot prices agree in commodity markets with transaction costs and use it to show that day-ahead prices better reflect real-time prices at all locations in California's wholesale electricity market after the introduction of financial trading on February 1st 2011. This results in a 2.7% reduction in market-wide production costs per megawatt-hour of electricity output in high demand days relative to low demand days after 2/1/2011.

Classical Option Pricing and Some Steps Further
Victor Olkhov

This paper modifies single assumption in the base of classical option pricing model and derives further extensions for the Black-Scholes-Merton equation. We regard the price as the ratio of the cost and the volume of market transaction and apply classical assumptions on stochastic Brownian motion not to the price but to the cost and the volume. This simple replacement leads to 2-dimensional BSM-like equation with two constant volatilities. We argue that decisions on the cost and the volume of market transactions are made under agents expectations. Random perturbations of expectations impact the market transactions and through them induce stochastic behavior of the underlying price. We derive BSM-like equation driven by Brownian motion of agents expectations. Agents expectations can be based on option trading data. We show how such expectations can lead to nonlinear BSM-like equations. Further we show that the Heston stochastic volatility option pricing model can be applied to our approximations and as example derive 3-dimensional BSM-like equation that describes option pricing with stochastic cost volatility and constant volume volatility. Diversity of BSM-like equations with 2-5 or more dimensions emphasizes complexity of option pricing problem. Such variety states the problem of reasonable balance between the accuracy of asset and option price description and the complexity of the equations under consideration. We hope that some of BSM-like equations derived in this paper may be useful for further development of assets and option market modeling.

Concentration in Mortgage Markets: GSE Exposure and Risk-Taking in Uncertain Times
Elul, Ronel,Gupta, Deeksha,Musto, David K.
When home prices threaten to decline, lenders bearing more of a community’s mortgage risk have an incentive to combat this decline with new lending that boosts demand. We test whether this incentive drove the government-sponsored enterprises (GSEs) to guarantee riskier mortgages in early 2007, as the chance of substantial declines grew from small to significant. To identify the effect we relate new risky lending to regional variation in the GSEs’ exposure and the interaction of this variation with home-price elasticity. We focus on the GSEs’ discretion across potential purchases by reference to the credit-score threshold that triggers manual underwriting. We conclude that this incentive helps explain the GSEs’ expansion of risky lending shortly before the financial crisis.

Corporate Social Responsibility and Stock Prices After the Financial Crisis: The Role of Primary Strategic CSR Activities
Pintekova, Aneta,Kukacka, Jiri
We analyze the relationship between corporate social responsibility and the stock market performance of U.S. companies in the post-global financial crisis period. A new measure of social responsibility, called the Thomson Reuters Environmental, Social, Governance, and Controversies Score (TRESGC Score), is used. The results of the fixed effects regression show a positive and statistically, as well as economically, significant impact of the TRESGC Score on the financial results of companies. As a novel feature of our analysis, socially responsible activities are further divided into those closely related to the core business of the examined companies, called primary strategic activities, and those that are not directly related to the companies' business core, called secondary activities. The impact of primary strategic activities on corporate stock market performance is significantly positive, while secondary activities do not have a substantial effect on the financial results. The empirical results thus suggest that if companies aim to increase their share prices via the corporate social responsibility channel, they should select their socially responsible initiatives strategically.

Cryptocurrency Market Reactions to Regulatory News
Auer, Raphael,Claessens, Stijn
Cryptocurrencies are often thought to operate out of the reach of national regulation, but in fact their valuations, transaction volumes and user bases react substantially to news about regulatory actions. The impact depends on the specific regulatory category to which the news relates: events related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect, followed by news on combating money laundering and the financing of terrorism, and on restricting the interoperability of cryptocurrencies with regulated markets. News pointing to the establishment of specific legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains. These results suggest that cryptocurrency markets rely on regulated financial institutions to operate and that these markets are segmented across jurisdictions.

Debt Collection Agencies and the Supply of Consumer Credit
Fedaseyeu, Viktar
This paper finds that stricter laws regulating third-party debt collection reduce the number of third-party debt collectors, lower the recovery rates on delinquent credit card loans, and lead to a modest decrease in the openings of new revolving lines of credit. Further, stricter third-party debt collection laws are associated with fewer consumer lawsuits against third-party debt collectors but not with a reduction in the overall number of consumer complaints. Overall, stricter third-party debt collection laws appear to restrict access to new revolving credit but have an ambiguous effect on the nonpecuniary costs that the debt collection process imposes on borrowers.

Dynamic Asset Allocation Based on Valuation and Momentum Applied to a Global All-Equity Portfolio
White, James,Haghani, Victor
There has been considerable research into dynamic global tactical asset allocation (GTAA) strategies driven by simple measures of Valuation and Momentum applied to a baseline balanced portfolio of equities and fixed income (see Blitz and van Vliet 2008, Wang and Kochard 2011, Gnedenko and Yelnik 2014, and Dewey and Haghani 2016). In sum, this research has found that historically, these Valuation-and-Momentum-driven investment approaches have produced higher returns and more attractive risk-adjusted returns than a static-weight approach. However, the above-cited research has been mostly silent on the question of how such an approach could be implemented and would have performed in the context of an All-Equity portfolio, where the Valuation and Momentum signals would drive a dynamic allocation between different regional equity markets. This note explores this question. It finds that such a dynamic approach would have produced higher absolute returns, and higher risk-adjusted returns, than a static approach would have produced. However, the improvement in simulated historical returns is less than the improvement that Valuation and Momentum deliver when applied to a balanced baseline portfolio of equities and fixed income. For example, simulated historical returns for the All-Equity strategy described below over the past roughly 40 years had about 50% more variability but only 20% higher returns than did a similar dynamic Global Balanced strategy. We examine a form of the strategy that can be followed by any investor with a simple brokerage account, using low-cost, liquid and widely available ETFs or index funds, and without use of leverage or shorting. The implementation we explore in this note trades monthly, with turnover averaging about 50% per annum. It is be based on data that is freely available in the public domain.

Ethics Events and Conditions of Possibility: How Sell-Side Financial Analysts Became Involved in Corporate Governance
Tan, Zhiyuan Simon
Mobilizing Foucault’s genealogy, this article investigates how an “ethics event,” that is, the involvement by some sell-side financial analysts in the US and UK across the past two decades in corporate governance, emerged. It is found that the complex relations formed between specific historical precedents, normative discourses, and fields of power rendered certain issues in financial markets morally problematic and constructed analysts’ corporate governance work as a potential solution. Contributing towards finance ethics research, this article develops a novel perspective to conceptualize the rise of ethically relevant practices in financial markets, focusing on how ethical problems and their solutions are outcomes of discursive construction and power relations. This article also revises our understanding of the boundary between technical norms and moral norms in financial markets. When ethical crises occur, it is argued, transforming technical practices and revising the technical norms adopted by financial professionals has potential for tackling ethical concerns.

Fiscal Policy During a Pandemic
Faria-e-Castro, Miguel
I study the effects of the 2019-20 coronavirus outbreak in the United States and subsequent fiscal policy response in a nonlinear DSGE model. The pandemic is a shock to the utility of contact-intensive services that propagates to other sectors via general equilibrium, triggering a deep recession. I use a calibrated version of the model to analyze different types of fiscal policies. I find that UI benefits are the most effective tool to stabilize income for borrowers, who are the hardest hit, while savers may favor unconditional transfers. Liquidity assistance programs are effective if the policy objective is to stabilize employment in the affected sector. I also study the effects of the $2 trillion CARES Act of 2020.

From Incurred Loss to Current Expected Credit Loss (CECL): A Forensic Analysis of the Allowance for Loan Losses in Unconditionally Cancelable Credit Card Portfolios
Canals-Cerda, Jose J.
The Current Expected Credit Loss (CECL) framework represents a new approach for calculating the allowance for credit losses. Credit cards are the most common form of revolving consumer credit and are likely to present conceptual and modeling challenges during CECL implementation. We look back at nine years of account-level credit card data, starting with 2008, over a time period encompassing the bulk of the Great Recession as well as several years of economic recovery. We analyze the performance of the CECL framework under plausible assumptions about allocations of future payments to existing credit card loans, a key implementation element. Our analysis focuses on three major themes: defaults, balances, and credit loss. Our analysis indicates that allowances are significantly impacted by specific payment allocation assumptions as well as downturn economic conditions. We also compare projected allowances with realized credit losses and observe a significant divergence resulting from the revolving nature of credit card portfolios. We extend our analysis across segments of the portfolio with different risk profiles. Interestingly, less risky segments of the portfolio are proportionally more impacted by specific payment assumptions and downturn economic conditions. We also analyze the impact of macroeconomic forecast error and find that it can be substantial and can be impacted by CECL implementation design features. Overall, our findings suggest that the effect of the new allowance framework on a specific credit card portfolio will depend critically on its risk profile. Thus, our findings should be interpreted qualitatively, rather than quantitatively. Finally, the goal is to gain a better understanding of the sensitivity of allowances to plausible variations in assumptions about the allocation of future payments to present credit card loans. Thus, we do not offer specific best practice guidance.

Governance Quality, Financial Reporting, and Shareholder Activism: On the Economic Effects of Mandatory Executive Compensation Disclosure
Schantl, Stefan
Early empirical studies find a negative association between firm performance and shareholder activism, whereas more recent studies document a positive association. We argue and theoretically show that a contributing factor for this change in behavior are regulations mandating firms to disclose more information about executive compensation. We develop a two-period model in which a potentially dependent board contracts with a CEO and a shareholder decides on the costly replacement of the board. Our key feature is information asymmetry between insiders and the shareholder about whether the firm faces a board dependence issue, i.e., information asymmetry about governance quality. We show that in the absence of any other information, shareholders intervene in firms with intermediate performance and dependent boards distort CEO contracts to manage earnings in order to avert replacement. However, if CEO pay levels are jointly disclosed with earnings, shareholders target intermediately and well-performing firms with a high pay-performance ratio and dependent boards' incentives to manage earnings are mitigated. Our results are consistent with the argument that executive compensation disclosure not only facilitates shareholder monitoring ex post but also alleviates its detrimental ex ante incentive effects. The paper provides a number of novel empirical predictions.

Health Insurance as an Income Stabilizer
Gallagher, Emily,Blascak, Nathan,Roll, Stephen,Grinstein-Weiss, Michal
We evaluate the effect of health insurance on the incidence of negative income shocks using the tax data and survey responses of nearly 14,000 low income households. Us-ing a regression discontinuity (RD) design and variation in the cost of nongroup pri-vate health insurance under the Affordable Care Act, we find that eligibility for sub-sidized Marketplace insurance is associated with a 16% and 9% decline in the rates of unexpected job loss and income loss, respectively. Effects are concentrated among households with past health costs and exist only for “unexpected” forms of earnings variation, suggesting a health-productivity link. Calculations based on our fuzzy RD estimate imply a $256 to $476 per year welfare benefit of health insurance in terms of reduced exposure to job loss.

Important Factors Determining Fintech Loan Default: Evidence from the Lendingclub Consumer Platform
Croux, Christophe,Jagtiani, Julapa,Korivi, Tarunsai,Vulanovic, Milos
This study examines key default determinants of fintech loans, using loan-level data from the LendingClub consumer platform during 2007â€"2018. We identify a robust set of contractual loan characteristics, borrower characteristics, and macroeconomic variables that are important in determining default. We find an important role of alternative data in determining loan default, even after controlling for the obvious risk characteristics and the local economic factors. The results are robust to different empirical approaches. We also find that homeownership and occupation are important factors in determining default. Lenders, however, are required to demonstrate that these factors do not result in any unfair credit decisions. In addition, we find that personal loans used for medical financing or small business financing are more risky than other personal loans, holding the same characteristics of the borrowers. Government support through various public-private programs could potentially make funding more accessible to those in need of medical services and small businesses without imposing excessive risk to small peer-to-peer (P2P) investors.

On Feedback Control in Kelly Betting: An Approximation Approach
Chung-Han Hsieh

In this paper, we consider a simple discrete-time optimal betting problem using the celebrated Kelly criterion, which calls for maximization of the expected logarithmic growth of wealth. While the classical Kelly betting problem can be solved via standard concave programming technique, an alternative but attractive approach is to invoke a Taylor-based approximation, which recast the problem into quadratic programming and obtain the closed-form approximate solution. The focal point of this paper is to fill some voids in the existing results by providing some interesting properties when such an approximate solution is used. Specifically, the best achievable betting performance, positivity of expected cumulative gain or loss and it associated variance, expected growth property, variance of logarithmic growth, and results related to the so-called survivability (no bankruptcy) are provided.

On the Preferences of CoCo Bond Buyers and Sellers
Caporale, Guglielmo Maria,Kang, Woo-Young
This paper estimates the preference scores of CoCo bond buyers and sellers by running multinomial logistic regressions taking into account both bond and issuing banks’ characteristics; it also provides evidence on the role of countryâˆ'specific CoCo bond market concentration. Buyers are defined as having a preference for CoCo bonds if their returnâˆ'toâˆ'risk is higher than the corresponding 25th, 50th and 75th annual percentile values; the preferences of buyers and sellers are assumed to be mutually exclusive. We find that the sellers’ needs to have bankruptcy protection and to comply with the Basel III financial regulations play a more important role than the buyers’ desire to increase their income from this fixedâˆ'income instrument. Sellers prefer to issue CoCo bonds when they are not financially sound whilst buyers prefer CoCo bonds with low risk; therefore, these two categories can be characterised as being riskâˆ'loving and riskâˆ'averse respectively, especially in the higher percentiles. Coupon payment, conversion mechanism, credit rating, P/B ratio and bank size appear to be the strongest global determinants of CoCo bond trading between buyers and sellers, these being very responsive to CoCo bond and issuing banks’ characteristics in the main European countries, Brazil, Mexico and a few of the main Far East economies (especially in the UK and China).

Quantifying Risks to Sovereign Market Access: Methods and Challenges
Zigraiova, Diana,Erce, Aitor,Jiang, Xu
In this paper we use data from the euro area to study episodes when sovereigns lose market access. We construct a detailed dataset with potential indicators of market access tensions, and evaluate their ability to forecast episodes when market access is lost, using various econometric approaches. We find that factors associated with high market access tensions are not limited to financial markets, but also encompass developments in global demand, macroeconomic conditions and the fiscal stance. Using the top-performing indicators, we construct a number of market tension indices and use them as single predictors of market access tensions. While such indices are helpful in capturing worsening conditions, they do not yield satisfactory out-of-sample results. On the other hand, using the same top-performing indicators in various multivariate models generates good forecasts of upcoming difficulties in accessing sovereign bond markets. Our results thus point to a trade-off between communicability and accuracy that policymakers face in the search for tools to evaluate risks to market access.

Real Estate Taxes and Home Value: Winners and Losers of Tcja
Li, Wenli,Yu, Edison
In this paper, we examine the impact of changes in the federal tax treatment of local property taxes stemming from the implementation of the Tax Cuts and Jobs Act (TCJA) in January 2018 on local housing markets. Using county-level house price information and IRS tax data, we find that capping the federal tax deduction of real estate taxes at $10,000 has caused the growth rate of home value to decline by an annualized 0.8 percentage point, or 15 percent, in areas where real estate taxes as shares of taxable income exceeded the national median. Additionally, these areas with a high real estate tax burden suffered from reductions in market liquidity after the reform. Fewer houses were transacted either in absolute numbers or as shares of total listings, houses stayed on the market longer before being sold, and more houses were listed with price cuts. Importantly, we find that the housing market slowdown was accompanied by declines in local construction employment growth as well as multi-family building permits. Furthermore, on net more people moved out of these areas after the reform. Finally, we show that the act has already had political consequences. In the 2018 midterm Senate elections, more voters voted for Democratic candidates in areas with high real estate tax burden than they did for Republican candidates.

Self-Fulfilling Debt Crises, Revisited
Aguiar, Mark,Chatterjee, Satyajit,Cole, Harold L.,Stangebye, Zachary
We revisit self-fulfilling rollover crises by exploring the potential uncertainty introduced by a gap in time (however small) between an auction of new debt and the payment of maturing liabilities. It is well known (Cole and Kehoe, 2000) that the lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt, leading to a failed auction and immediate default. We show that the same lack of commitment leads to a rich set of possible self-fulfilling crises, including a government that issues more debt because of the crisis, albeit at depressed prices. Another possible outcome is a “sudden stop” (or forced austerity) in which the government sharply curtails debt issuance. Both outcomes stem from the government’s incentive to eliminate uncertainty about imminent payments at the time of auction by altering the level of debt issuance. In an otherwise standard quantitative version of the model, including such crises in-creases the default probabilities by a factor of five and the spread volatility by a factor of twenty-five.

Structural Interdependence of Price and Demand in a Model of the Foreign Exchange Market with Heterogeneous Speculators: Evidence from High-frequency Data
Bargigli, Leonardo,Cifarelli, Giulio
We assume that the variations of the exchange rate depend on the current net demand of the base currency as a consequence of market making, and that the current net demand of the base currency depends on current and past variations of the exchange rate as a consequence of how future price expectations are formed by bounded rational agents. We achieve identification supposing that the structural shocks of price variations and demand follow a GARCH process. Using high-frequency transaction data of the EUR/USD market in 2016, we show that the simultaneous effects of price on demand and vice-versa are both significant and positive. Our estimates suggest that one important source of heterogeneity in demand might be missing from our model, since the structural errors are negatively correlated.

Technological improvement rate estimates for all technologies: Use of patent data and an extended domain description
Anuraag Singh,Giorgio Triulzi,Christopher L. Magee

In this work, we attempt to provide a comprehensive granular account of the pace of technological change. More specifically, we survey estimated yearly performance improvement rates for nearly all definable technologies for the first time. We do this by creating a correspondence of all patents within the US patent system to a set of technology domains. A technology domain is a body of patented inventions achieving the same technological function using the same knowledge and scientific principles. We obtain a set of 1757 domains using an extension of the previously defined classification overlap method (COM). These domains contain 97.14% of all patents within the entire US patent system. From the identified patent sets, we calculated the average centrality of the patents in each domain to estimate their improvement rates, following a methodology tested in prior work. The estimated improvement rates vary from a low of 1.9% per year for the Mechanical Skin treatment - Hair Removal and wrinkles domain to a high of 228.8% per year for the Network management - client-server applications domain. We developed a one-line descriptor identifying the technological function achieved and the underlying knowledge base for the largest 50, fastest 20 as well as slowest 20 of these domains, which cover more than forty percent of the patent system. In general, the rates of improvement were not a strong function of the patent set size and the fastest improving domains are predominantly software-based. We make available an online system that allows for automated searching for domains and improvement rates corresponding to any technology of interest to researchers, strategists and policy formulators.

Textual Construction of Comparative Space: How Analyst Corporate Governance Reports Redefine and Create ‘Best Practice’
Tan, Zhiyuan Simon
Purpose â€" This paper seeks to contribute to scholarly work on the role of sell-side financial analysts in corporate governance. It examines the more recent work products pertaining specifically to corporate governance that analysts based in the US and UK have generated in the past two decades, namely, their corporate governance reports (CG reports). Specifically, this paper focuses on analysing how analyst CG reports constitute a comparative space in which the governance procedures of companies are evaluated and ‘best practices’ are created.Design/methodology/approach â€" This study involves a social constructivist textual analysis of 48 CG reports produced by analysts based in the US and UK between 1998 and 2009.Findings â€" Analyst CG reports textually construct a comparative space comprising four dimensions. First, the space is constructed for some carefully edited users to evaluate the governance of companies. Second, the construction of this space requires the selection of ‘building materials’, i.e., governance issues included in the space that render companies amenable to evaluation and comparison. Third, by linking the range of governance issues chosen to formal regulations, firms are rendered governable and regulatory requirements reinterpreted. Lastly, by using different types of inscriptions, such as narratives and tables, the space highlights ‘winners’, i.e., those companies which do better than others, and constructs their governance procedures as ‘best practices’.Research limitations/implications â€" This research provides a first step towards an in-depth understanding of analyst CG reports. The insights from this paper generate a range of areas for future research, including how these reports are produced and used.Originality/value â€" This paper adds to the existing literature focusing on the role of analysts in corporate governance. It extends previous studies by examining the more recent and debatable work products generated by analysts, namely, their CG reports, and suggests an extended corporate governance role for them. Theoretically, analyst CG reports are conceptualised as ‘inscriptions’ that construct ‘documentary reality’. The notion of ‘editing’ is also drawn upon, to analyse a particular way in which documentary reality is constructed. Accordingly, this paper broadens the theoretical perspectives used in corporate governance research.

The Effects of COVID-19 Pandemic on Oil Prices, CO2 Emissions and the Stock Market: Evidence from a VAR Model
Mzoughi, Hela,Urom, Christian,Uddin, Gazi Salah,GUESMI, Khaled
This paper examines the impact of COVID-19 pandemic on oil prices, CO2 emissions and stock market volatility over the period January 22, 2020 â€" March 30, 2020 using an unrestricted VAR. We demonstrate that although the increasing number of COVID-19 infections causeda decrease in the price of crude oil, the negative response of the oil market is short-lived.However, the response of economic activities as measured by CO2 emissions to a shock on COVID-19 infections is negative throughout the forecast period. Also, we find that the current situation created by COVID-19 led appears to have had a stronger impact on equity market volatility than on crude oil prices and CO2 emissions. Lastly, we find that the share of forecast error variance in the level of CO2 emissions is stronger than that of the energy and stock markets. Taken together, our findings shed light on the need for economic intervention to speed up recovery and boost investor’ perception of long-term growth.

The Effects of a 'Black Swan' Event (COVID-19) on Herding Behavior in Cryptocurrency Markets: Evidence from Cryptocurrency USD, EUR, JPY and KRW Markets
Yarovaya, Larisa,Matkovskyy, Roman,Jalan, Akanksha
This paper analyses herding in cryptocurrency markets in the time of the COVID-19 pandemic. We employ a combination of quantitative methods to hourly prices of the four most traded cryptocurrency markets - USD, EUR, JPY and KRW - for the period from 1st January 2019 to 13th March 2020. While there are several strong theoretical reasons to observe the “black swan” effect on cryptocurrency herding, our results suggest that COVID-19 does not amplify herding in cryptocurrency markets. In all markets studied, herding remains contingent on up or down markets days, but does not get stronger during the COVID-19. These results are important for cryptocurrency investors and regulators to enhance their understanding of cryptocurrency markets and the financial effects of the COVID-19 pandemic.

The Geography of Housing Market Liquidity During the Great Recession
Famiglietti, Matthew,Hedlund, Aaron
Using detailed micro data at the ZIP code level, this article explores the regional variation in housing market performance to account for the severity of the Great Recession. The granularity of the data, relative to a more traditional analysis at the county level, is useful for evaluating the performance of the housing market because credit and local macroeconomic variables are tied to housing valuations. The deterioration of the ability to transact (buy and sell) housing units, often referred to as housing liquidity, is an important link that connects housing outcomes with real and credit variables. The data indicate that the timing, severity, and duration of the recession varied across regions and was closely connected with the behavior of the housing market. The deterioration in housing liquidity was uniform across all house price tiers (i.e., bottom, middle, and upper end). Furthermore, there was correlation across areas between the magnitude of the declines in housing liquidity and the severity of the deterioration in house prices and macroeconomic conditions.

The Global Impact of COVID-19 on Financial Markets
Wang, Wenzhao,Enilov, Martin
This paper hypothesizes that the number of novel coronavirus disease (COVID-19) cases significantly influence the stock returns in international financial markets. Our empirical evidence, based on panel Granger non-causality tests, strongly supports this hypothesis for Group of Seven (G7) countries. This also adds to the growing literature on the impact of non-economic variables on financial markets, from the perspective of diseases.

The Global Impact of COVID-19 on Fintech Adoption
Fu, Jonathan,Mishra, Mrinal
We draw on mobile application data from 74 countries to document the effects of the COVID-19 pandemic on the adoption of digital finance and fintech. We estimate that the spread of COVID-19 and related government lockdowns have led to between a 24 and 32 percent increase in the relative rate of daily downloads of finance mobile applications in the sample countries. In absolute terms, this equates to an average daily increase of roughly 5.2 to 6.3 million application downloads and an aggregate increase of about 316 million app downloads since the pandemic’s outbreak to the present, taking into account prior trends. Most regions across the world exhibit notable increases in absolute, relative, and per capita terms. Preliminary analysis of country-level characteristics suggest that market size and demographics, rather than level of economic development and ex-ante adoption rates, drive differential trends.

The Great Leverage 2.0? A Tale of Different Indicators of Corporate Leverage
Bräuning, Falk,Wang, J. Christina
Many policymakers have expressed concerns about the rise in nonfinancial corporate leverage and the risks this poses to financial stability, since (1) high leverage raises the odds of firms becoming a source of adverse shocks, and (2) high leverage amplifies the role of firms in propagating other adverse shocks. This policy brief examines alternative indicators of leverage, focusing especially on the somewhat disparate signals they send regarding the current state of indebtedness of nonfinancial corporate businesses. Even though the aggregate nonfinancial corporate debt-to-income ratio is at a historical high, these firms’ ability to service the debt, as measured by the interest coverage ratio, looks healthy. A simple model shows that this pattern can be consistent with firms’ optimal choice of leverage in response to an exogenous decline in interest rates. On the other hand, the model also reveals that the fall in the interest coverage ratio due to a given yield increase is magnified when interest rates are at low levels. The implication is that the elevated nonfinancial corporate debt-to-income ratio that has been present in recent years raises the downside risk of firms becoming unable to service their debt following any adverse shock, such as a decline in income or an increase in risk premia.

The Impact of Corporate Social and Environment Performance on Credit Rating Prediction: North America Versus Europe
Dorfleitner, Gregor,Grebler, Johannes,Utz, Sebastian
We quantify to what extent the quality of credit rating predictions improves through integrating measures of corporate social performance (CSP) in an established credit risk model. We provide comprehensive evidence of the comparative informational advantage of considering CSP in predicting credit ratings of North American and European firms. In the North American sample both environmental and social performance have an explanatory impact. The out-of-sample prediction quality is improved by more than 0.8%. By contrast, only the social performance increases the explanatory power in the European sample while environment performance does not. Overall, we show that CSP is a relevant variable for predicting credit ratings. In general, our findings support the risk mitigation view of CSP indicating that firms with high CSP are less risky and thus have better credit ratings. However, obviously the quality of the relationship depends on the socio-economical and cultural environment as well, as can be seen from the differing results in North America and Europa.

The Peculiarities of the Estimation Probability of Bankruptcy of Iron and Steel Companies: Formulation of the Research Problem
Markovskaya, Elizaveta,Varlakova, Kristina
The market of metallurgy is exposed to economic cycles, like many different markets. But in contrast of others it is the only economic sector that can disrupt the economy of other areas with its financial instability. This is due to the fact that the production of metallurgical plants is the basis for such industries as rocketry, aircraft industry, production of high-strength joints, defense industry and so on. By reason of metallurgy is not only capable of influencing these areas, but also depends on them, crisis in some of the related sectors can strongly affect its economy.Moreover, developed market competitors and restrictive actions of some countries constitute a serious threat to local enterprises. That is why it is obvious that metallurgical companies are under serious pressure. Therefore, it is necessary to create a method that can reflect a probability of enterprises bankruptcy. The goal of that work was to find the optimal model for calculating the probability of metallurgical enterprises bankruptcy. To achieve this goal, the concept of probability of bankruptcy and methods of its calculation were studied; methods were compared; problems of assessing the probability of bankruptcy were identified; features of metallurgical enterprises were analyzed; models of assessing the probability of bankruptcy for such companies were developed and optimal model was detected. The results of research confirmed the hypothesis that the model, developed with the account of the specifics of the metallurgical industry, shows the most accurate forecasts. It was also found out that the use of the Olson model is possible, but on condition that the coefficients are recalculated before the explanatory indicators for modern data. The obtained results could be applied in practice in calculating the probability of bankruptcy of enterprises of the metallurgical industry.

The Price of Asymmetric Dependence: International Evidence
Alcock, Jamie,Sinagl, Petra
Asymmetric dependence between stock returns and market returns is significantly priced in international equity returns. Of all the commonly considered factors, asymmetric dependence is the only factor priced in all 38 markets examined. Internationally, investors require additional compensation to hold assets displaying asymmetric dependence. The degree of asymmetric dependence increases faster in countries experiencing stronger growth in their financial markets. Asymmetric dependence is stronger in fast-developing equity markets than in the US market. Our findings support recognition of asymmetric dependence as a risk factor that has significant implications for, inter alia, asset pricing, cost of capital, and performance evaluation of international equities.

The Role of Stakeholder E-Engagement on the Relation between Board Independence and Environmental Disclosure. Toward a Cohesive Corporate Governance. Evidence from Italian Listed Companies
Lepore, Luigi
Companies worldwide increasingly engaged in corporate social responsibility disclosure, particularly corporate environmental disclosure (CED) has gained increasing importance since the 1980s. Reporting environmental performance has become a fundamental corporate governance mechanism to improve relationship with stakeholders, enhancing companies’ image, consensus, trust and social legitimacy, particularly in a period of great change like this, where people are demonstrating a very high attention to environmental issues, due to different phenomena, like the pandemic emergency of Covid-19, the sustainable capitalism, etc.. The importance of CED has been enormously amplified in the last decades since the development of the Internet and social media (SM) as universal interaction tools useful for stakeholder engagement. Through SM stakeholder can easily ask for information, express and share requests, organize and coordinate interventions. Indeed, SM have become an important source of institutional pressure for firms and board of directors. They acts as a resonance chamber for stakeholder opinions, in which institutional pressure grows and is continuously transmitted from society to firm, influencing the firm legitimacy and the directors’ reputation. The aim of this paper is to investigate the relationship between board independence and CED, deepening the moderating role of stakeholder e-engagement through Facebook, LinkedIn and Twitter. The effectiveness of the board of directors as a monitoring mechanism is crucial to corporate transparency, especially in an institutional environment where other corporate governance mechanisms fail to guarantee stakeholder rights. We analyse a sample of 218 firm-year observations related to Italian non-financial listed companies for the period 2017-2018 and found that board independence and stakeholder e-engagement positively influence CED, whereas institutional pressure due to stakeholder e-engagement through SM play an important role on independent directors’ preferences and imply that external directors better consider the interest of external stakeholders, stimulating the company’s environmental disclosure.

The socio-economic determinants of the coronavirus disease (COVID-19) pandemic
Viktor Stojkoski,Zoran Utkovski,Petar Jolakoski,Dragan Tevdovski,Ljupco Kocarev

The magnitude of the coronavirus disease (COVID-19) pandemic has an enormous impact on the social life and the economic activities in almost every country in the world. Besides the biological and epidemiological factors, a multitude of social and economic criteria also govern the extent of the coronavirus disease spread in the population. Consequently, there is an active debate regarding the critical socio-economic determinants that contribute to the resulting pandemic. In this paper, we contribute towards the resolution of the debate by leveraging Bayesian model averaging techniques and country level data to investigate the potential of 31 determinant, describing a diverse set of socio-economic characteristics, in explaining the coronavirus pandemic outcome.

US Equity Risk Premiums during the COVID-19 Pandemic
Alan L. Lewis

We study equity risk premiums in the United States during the COVID-19 pandemic.

Volatility, Dark Trading and Market Quality: Evidence from the 2020 COVID-19 Pandemic-Driven Market Volatility
Ibikunle, Gbenga,Rzayev, Khaladdin
We exploit the exogenous shock of the COVID-19 pandemic on financial markets and regulatory restrictions on dark trading to investigate how volatility drives dark market share and trader venue selection. We find that, consistent with theory, excessive volatility on lit exchanges is linked with an economically significant loss of market share by dark pools to lit exchanges. The dynamics of market share loss are driven by the cross-migration of informed and uninformed traders between lit and dark venues. Informed traders migrate from lit venues to dark venues when lit venues’ volatility becomes excessive, while uninformed traders, wary of the presence of informed traders in dark pools, shift their trading to lit exchanges rather than delay trading in a volatile market environment. The market quality implications of the cross-migration are mixed: while it improves liquidity on the lit exchange, it results in a loss of informational efficiency.

What Are the Risk-Taking Properties of Incentive Plans Based on Relative Performance?
Timmermans, Oscar
This study examines the risk-taking properties of incentive plans based on relative performance. The usage of these incentive plans in large U.S. firms has grown from 22 to 67 percent from 2006 to 2019. I predict and find that these incentive plans possess tournament-style features that affect firm risk differently than individual incentives. Consistent with my theoretical predictions, I also find large differential effects of cross-sectional variation in payout structures and peer selection on firm risk. Collectively, my findings provide evidence on how contemporaneous executive compensation contracts expose firms to material risks.

What Explains the Postâ€"2011 Trends of Longer Maturities and Rising Default Rates on Auto Loans?
Calem, Paul S.,Ramasamy, Chellappan,Wang, Jenna
This paper quantifies relationships of long-term auto borrowing and auto-loan default to observable borrower characteristics and economic variables. We also quantify the residual components of the trends in long-term borrowing and delinquency not attributable to identifiable factors. Second, our paper provides new evidence on the relationship between longer-term borrowing and auto-loan default risk. We find that observable factors associated with the choice of a long loan term usually indicate an increased risk of default. We also find that the increasing share of long-term loans and the rising frequency of auto-loan default are mostly attributable by nonspecific, year-of-origination (fixed) effects rather than factors observable from our data or observable to lenders. Moreover, although borrowers opting for long loan terms are more likely to default in most comparisons, the increasing share of borrowers selecting a long loan term between 2011 and 2016 did not materially contribute to the rise in default rates. Overall, our analysis highlights the role of unobserved borrower characteristics in driving the recent trends in long-term borrowing and default.

“Don't Know What You Got Till It's Gone”â€"The Community Reinvestment Act in a Changing Financial Landscape
Ding, Lei,Nakamura, Leonard
This study provides new evidence on the impact of the Community Reinvestment Act (CRA) on mortgage lending by taking advantage of an exogenous policy shock in 2014, which caused significant changes in neighborhoods’ CRA eligibility in the Philadelphia market. The loss of CRA coverage leads to an over 10 percent decrease in purchase originations by CRA-regulated lenders. While nondepository institutions replace approximately half, but not all, of the decreased lending, their increased market share was accompanied by a greater involvement in riskier and more costly FHA lending. This study demonstrates how different lenders respond to the incentive of CRA credit.